Why Dr. Copper Is Wrong About China’s Economy

China’s copper imports surged in May, rising 65 percent over the previous year and fueling hopes of a pickup in growth for the world’s second-largest economy. But experts say that the country’s appetite for the industrial metal is “opportunistic” and doesn’t reflect economic fundamentals.

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Reel of uninsulated copper wire

Copper , which is used for wiring in homes and consumer goods, has long been seen as a proxy for economic activity, earning it the moniker “Dr. Copper.”

Over the weekend, China reported a 12 percent increase in imports for the metal in May compared to April, reversing a decline in imports seen over the previous two months. Year-on-year imports were up 65 percent. The import data led copper to post its biggest one-day gain in nearly two months on Monday.

But, Michael Langford, head trader atStreamTrading in Australia, says the ramp up in imports is merely a “restocking event” driven by lower copper prices, which have declined almost 15 percent over the last 12 months.

According to ANZ Research, out of the 1.6 million metric tons of copper imported into China —the world’s largest consumer of the red metal — from January to May, approximately 400,000-500,000 tons are sitting in warehouses. Over the corresponding five-month period last year, China imported just 900,000 tons of copper.

“Merchants, banks and financial institutions have taken advantage of lower freight rates and lower storage costs in the mainland to import copper into China so that they can be closer to the main source of demand,” Trevethan, senior commodities strategist, ANZ Research said. “There are significant stockpiles that are being held in bonded storage.”

Another reason why copper is an inaccurate gauge of economic activity in China, according to Trevethan, is that in addition to being used as an industrial metal, copper is also being used as a financial instrument or as collateral for loans due to a lack of availability of yuan loans.

In order to get around tight credit conditions, he says borrowers take out dollar loans, purchase copper in the international market, import the metal and sell it in China for yuan.

“You have all this copper in theory, but some of it is tied in financing and collateral for loans, and some of it has been tightly held by the financial institutions who have imported it,” he added.

“The idea of Dr. Copper perhaps has passed a little bit, there are other materials out that would make more sense to look at,” Trevethan said, adding that naptha — an oil derivative used in making industrial chemicals and plastics — could be a better indicator of China’s economic wellbeing. Speculative activity in naptha is limited and it is not used for credit or inventory financing, he said.

Langford says commodities on the whole are not a good gauge of the country’s economic momentum because China is in the process of “smoothing out the commodities cycle” by buying massive stockpiles when prices are cheap to reduce exposure to volatility in global resource prices.

He instead recommends looking at electricity consumption and money supply for a better analysis of economic strength.

Both of these indicators show that China’s economy may be slowing more sharply than previously thought in recent months, according to analysts.